The following is the introduction to my new Reason study, The Next California Budget, on how to fix the state's budget process:
California often leads the nation, and the current fiscal crisis is no exception. Jaws dropped from coast to coast at the size of its $26.3 billion shortfall, a quarter of the general fund. Even more astounding was state leaders’ difficulty in reaching a budget deal—not just this year, but year after year. With its repeated use of borrowing and IOUs, the Golden State has become the poster child for fiscal irresponsibility.
Regardless of how Californians feel about the latest budget, most would agree that somehow, some way, the state’s leaders must do it differently next year. Californians are tired of watching their leaders debate how much to spend on X vs. Y, with no attention to the results these expenditures produce or the long-term liabilities they create for the state. Taxpayers are not unwilling to fund state government, but they want their tax dollars to produce genuine value. They want their leaders to fund programs that work, and to kill—or fix—those that don’t.
One factor contributing to the paralysis has been the constitutional two-thirds requirement, in both houses of the legislature, to approve a budget. There are many perspectives on the wisdom of this constitutional amendment, but most would agree that it is a blunt instrument. Without some other form of fiscal accountability on the legislature’s part, however, citizens are not likely to consider repeal. This paper argues for an alternate form of fiscal discipline, known as Budgeting for Outcomes (BFO). It would help the governor and/or legislature build the budget in a way that delivers the results citizens want at a price they are willing to pay.
Budgeting for Outcomes has already proven its value in Washington State, Iowa and more than a dozen other states, cities, counties and school districts. It combines strategic planning, zero-based budgeting and performance budgeting in a workable, common-sense package. Since it debuted with Washington Governor Gary Locke seven years ago, it has spread rapidly, as the box below demonstrates.
Jurisdictions That Have Used Budgeting for Outcomes
- South Carolina
- Louisiana Dept. of Culture, Recreation and Tourism
- Snohomish, WA
- Multnomah, OR
- Mesa County, CO
- Polk County, FL
- Larimer County, CO
- Coconino County, AZ
- Azusa, CA
- Spokane, WA
- Dallas, TX
- Ft. Collins, CO
- Northglenn, CO
- Redmond, WA
- Eugene, OR
- Savannah, GA
- Baltimore, MD
- Tacoma Metro Parks, WA
- Jefferson County, CO
- Billings, MT
Budgeting for Outcomes has not been equally successful in all these jurisdictions; it is no magic wand. As with other reforms, its success depends on whether political leaders are willing to use it to make the hard choices necessary. Nor does BFO guarantee that there will be no future budget shortfalls. The natural hills and valleys of the business cycle will assure shortfalls in times of recession. And until this country manages to control health care spending—which has gone up an
average of 10 percent a year for the last 50 years—many states will face structural deficits even in good times. But Budgeting for Outcomes can help elected leaders manage these challenges—deciding what is worth funding and what must be jettisoned—in a more rational, effective and transparent way. Most jurisdictions that have tried it, including Washington, have been pleased enough to continue using it.
BFO starts where most budget processes end: elected leaders make a decision about how much money they want to spend next year. They decide up front whether to raise or cut taxes or fees. Then they work with citizens to define the results most important to them: a better economy, better schools, better health, better safety, better mobility, a cleaner environment and so on. They decide how much each of these outcomes is worth and divide the money among them.
For each finite pot of money, they assign a team of strategic thinkers who understand the policy arena but don’t have an axe to grind or a budget to protect. These “results teams” act as buyers for the citizens. Their task is to produce the outcome, not to fund programs. “Better mobility” as an outcome does not necessarily mean more money for the Highway Patrol or the Department of Transportation, for instance; it may mean congestion pricing on toll roads and more fiber optic cable.
Results teams start by doing the research necessary to figure out what factors most affect their desired outcome. Given that analysis, they recommend what strategies the state should pursue. Once they define these purchasing strategies, the results teams ask government program managers—the sellers in this marketplace—to make their best offers. These offers lay out what programs they can deliver to contribute to these strategies, at what costs, with what results. (All tax expenditures—i.e., tax breaks for particular groups or activities—should also be treated as offers, just like other spending programs.)
The results teams then rank these offers, from most cost-effective to least, draw a line where the money runs out, send the rankings back out, and ask for better offers. At this point, when managers see their programs ranked low, they wake up and start scouring the globe for new ways to produce better results for less money. When the second round of offers comes in, the results teams again rank them, buy from the top, and draw a line when the money runs out. They send their rankings to the elected leaders, who use them to put together the budget. (Normally the executive does this and presents the budget to the legislature, but given California’s political realities, the governor and legislative leaders might be wise to work together on the process.) Adjustments to reality are always necessary: some low-ranked programs are mandated by the courts, for instance, or by a higher level of government. Others, particularly in California, are mandated by voter initiative. But most of the rankings hold, and the budget thus proposes to fund what works and eliminate what doesn’t.
Every citizen can understand the resulting budget, because it reflects common sense and taxpayers’ priorities. It can be summarized in one page per outcome: a list of programs to be funded, a line, and below that, a list of programs the state can no longer afford, because they don’t produce enough value.
The full study is here: